2
votes
2answers
216 views

Time Varying Volatility

If stock returns ($r_t$) are not auto correlated why is that the squared term of the returns (volatility) exhibit serial correlation? Does heteroskedacity, by its nature, imply that time varying ...
1
vote
1answer
114 views

How does one use the Johansen cointegration test in a linear time series model?

How does one use the Johansen cointegration test in a linear time series model? Should I only use normalized coeffients for interpretation? Or, once I know that the variables are cointegrated, do I ...
2
votes
0answers
62 views

Is there an appropriate sequence to tests during model diagnosis?

How should one order (sequence) the following tests? Stationarity test Johansen cointegration test Normality/Histogram test Autocorrelation test Heteroskedasticity test Multicollinearity test ...
5
votes
1answer
759 views

Implied dividend estimation

I am looking at two different ways of estimating the expected / implied dividends from market data. 1. Dividend futures I know that this asset class is not very liquid and might not be ...
2
votes
1answer
541 views

What exactly is an ISO order?

I have been looking this up and I feel like I keep running into different definitions. My understanding is that an ISO order is one which will get filled with the displayed quantity in a particular ...
2
votes
0answers
168 views

How replicate data using PCA

I have a set of date covering petrol prices. My example has two columns where each row represents a sequential date. ...
2
votes
1answer
118 views

Hedging differences between equity and index options?

Suppose we hedge an index option using futures on that index. How would the hedging strategy be different if the underlying could be traded directly (from a risk point of view)?
2
votes
0answers
289 views

How does Hanson's Market Maker (LMSR) work?

Implementing Hanson's Market Maker states: If the market maker wants to quote a "current price", he can. The current price for outcome 1 is: $$ \mbox{price1} = ...
4
votes
2answers
2k views

What is the difference between convertible bond and bond with warrant?

One site suggested the difference is that the warrant in the bond with warrant is a fixed price on company stock. E.g. for a \$1000 bond, you can buy 500 shares at \$2 each. And that convertible bonds ...
5
votes
1answer
2k views

How to simulate correlated Geometric brownian motion for n assets?

So I'm trying to simulate currency movements for several currencies with a given correlation matrix. I have the initial price, drift and volatility for each of the separate currencies, and I want to ...
2
votes
2answers
399 views

Trading days or calendar days for Black-Scholes parameters?

Black-Scholes requires volatility estimated in trading days. How does this affect other parameters? Specifically, should the time-to-expiration also be in trading days? And how does this affect the ...
3
votes
2answers
245 views

Transformation to reduce standard deviation without changing median

Consider some negative skew and high kurtosis return time-series $X_t$. I do not know the functional form of the pdf of $X_t$ and have about 150,000 data points. Suppose that I was to create an ...
4
votes
5answers
547 views

In Black-Scholes, why is $\log{\frac{S_{t+\triangle t}}{S_t}} \sim \phi{((\mu - \frac{1}{2}\sigma^2)\triangle t, \sigma^2 \triangle t)}$?

Namely, I dont understand why the mean is $(\mu - \frac{1}{2}\sigma^2)\triangle t$ and not just $\mu \triangle t$. I am aware that it is supposed to represent a lognormal distribution, but I guess I'm ...
2
votes
2answers
560 views

Calculating Geometric mean

I need to annualize daily returns for about 120 firms for over a period of 10 years. I chose to calculate the geometric return because 1) it is the actual return 2) to avoid the asymmetric effect of ...
3
votes
5answers
2k views

Convexity adjustment for a forward swap rate

I recently heard that for a forward swap rate (for example, the fixed rate of a swap that will start in one year and end in five years), I need to do a convexity adjustment in order to get the right ...
2
votes
3answers
793 views

How is historical data for forex collected or computed?

I'm looking at four sources of forex data, as compiled in the question, What data sources are available online? And I think I must be misunderstanding something, perhaps something fundamental, but I'm ...
2
votes
0answers
83 views

Industry factors without GICS

I'm working through the Quantitative Equity Portfolio Management book by Chincarini and Kim. I'd like to build a basic industry-based fundamental factor model. As this is a pet project for ...
0
votes
0answers
68 views

Mean-variance minimizser

I am working on a project that involves pricing european call options in incomplete markets. Now I need to find a unique measure $Q^*$ such that $$Q^* = \min_{M_e} E_Q [V(T)-F(w)]^2 = \min_{u} E_Q ...
1
vote
0answers
496 views

portfolio optimization with a loop

I am attempting to minimize the variance of a 3 stock portfolio using optimization within a loop. What I have done is calculated the stock returns and cov matrix from dates 1980-01-01 to 1989-12-31 ...
0
votes
0answers
64 views

How to Maximise Efficiency With hp12c gold calculator

I would like to calculate the net present value of a loan schedule or an equation of value. e.g. "For an investor receives R1 000 after 2 years, R2 000 after 5 years and R4000 after 7 years, how much ...
1
vote
1answer
289 views

How is the MESA sine wave calculated?

I've found many, many sites which describe what the MESA sine wave looks like and how to interpret it. But I have yet to find any site that describes the actual formula used to calculate the sine ...
2
votes
2answers
2k views

Cointegration tests

I'm trying to figure out how to perform cointegration tests in R between 2 time series. I'm using po.test from the package ...
2
votes
2answers
162 views

How to synchronize put and call option-data?

I recently retrieved a large amount of European option data, for call and put prices, from OptionMetrics. Doing so for the same time period I get a file consisting of 62558 rows of call prices & ...
0
votes
1answer
3k views

Calculating spot rate of interest

You are given the following information regarding the domestic government fixed-interest bond market: The current price of a one-year bond paying coupons at a rate of $4.5$% per annum and redeemed ...
10
votes
4answers
733 views

Resources for finding scholarly research on topics in quantitative finance?

A friend and I have taken up an interest in quantitative finance, and we're pretty much starting from scratch—neither of us have backgrounds in finance, but rather electrical engineering and ...
5
votes
1answer
1k views

Longstaff-Schwartz (Least Squares Monte Carlo) applied to American Options

I'm working on an implementation in R of Longstaff & Schwartz method from the this 2001 article. I've managed to build code that replicates their prices in table 1 (p. 127), but only for the ones ...
8
votes
3answers
909 views

how do you evaluate an FX market EMS?

My firm is investigating FX EMS systems to see if we can reduce execution costs for our trading strategies that involve FX (not low latency). The liquidity providers are a few major banks. We're ...
3
votes
1answer
103 views

Can Central Index Keys (CIKs) issued by the SEC be reassigned?

Suppose company A has CIK 0000012345 and ceases to exist. At some later time, company B registers with the SEC to submit filings. Is it possible that company B will be assigned the same CIK ...
5
votes
3answers
5k views

Implied Volatility Calculation

We all know if you back out of the BS option pricing model you can derive and solve what the options is "implying" as its volatility. However, what is the formula used to derive IV (can anyone direct ...
5
votes
0answers
171 views

Stress testing covariance

Going one level beyond stressed scenarios, to parameters e.g. for a VaR measure: what are the most common approaches for stressing a covariance/correlation matrix, especially taking portfolio exposure ...
2
votes
1answer
226 views

Using cointegration to prove that a long-short strategy is market neutral (in CAPM sense)

I am trying to prove that a long-short strategy invested according to the cointegrated relationship from Engle-Granger's. So essentially I'm trying to show that the return $r_{XY}$ of the portfolio (X ...
2
votes
1answer
108 views

How are option expiration dates decided?

I looked at the CBOE website and they say the expiration is the Saturday following the third Friday of each month. However, I look up an options chain for Google, for example, and I see three ...
5
votes
2answers
656 views

Best tool to generate cashflow diagrams

I often have to generate cashflow diagrams. I was wondering if anyone has a good tool to generate them in either $\LaTeX$ or a picture?
3
votes
0answers
178 views

PCA Variances and Principal Portfolio Variances

In Meucci's paper called "Managing Diversification" he mentions that: "Indeed, the eigenvalues A correspond to the variances of these uncorrelated portfolios" I tried to replicate it but found they ...
3
votes
2answers
277 views

How do you know if if an option is priced correctly?

Besides obvious extreme examples (ie volatility going to infinity, infinite time, zero time, or zero volatility, deep OTM/ITM ) how does one gauge if an option is 'correct' or at least in the ...
1
vote
1answer
121 views

Greeks of Basket

I am considering a product composed of 10 underlying assets. The maturity is 5 year. Each year if the performance of the equi-weighted portfolio reach a barrier, it pays a coupon. My question concern ...
4
votes
1answer
1k views

Call option arbitrage opportunity

I am having trouble wrapping my head around some text provided to us by our lecturer (unfortunately he is currently unavailable). If we let $c$ be the price of a European call option, $S_0$ the ...
2
votes
0answers
89 views

Benchmarking risk

Given the portfolio return $R$ and the benchmark return $B$, I want to define a risk indicator, measuring the ability to beat the benchmark ($R>B$), given the downside risk taken; the latter not ...
1
vote
1answer
273 views

How to download risk free rate?

I've been trying to download the national interest rates for some countries. When i use Datastream, it only gives me the currency return (while i need yield). Can someone please tell how to ...
2
votes
0answers
361 views

How to correctly construct a value- and equally weighted portfolio consisting of property-types?

A problem of which I couldn’t find the answer on the forum is about the construction of equally-weighted and value-weighted portfolio. I want to compute the equally-weighted property-type portfolio ...
3
votes
1answer
2k views

t-statistics for the mean return, using Newey-West standard errors

I have seen that in several papers, where the aim was to evaluate the performance of a certain investment strategy, they use t-statistics to test for significance in the results. However, this seems a ...
4
votes
1answer
181 views

Ito's Lemma - Integrand depends on upper limit of integration

A problem I came across while practicing using Ito's Lemma had a process with an integral whose integrand depends on the upper limit of integration (the goal is to find $dZ_{t}$): ...
2
votes
0answers
91 views

What does negative gamma mean in APGARCH model?

I got a gamma of -0.1321677. ...
1
vote
0answers
117 views

Modelling long run relationship between dividend and earnings

I am working on a paper where I have to model the long run relationship between earnings and dividends. I have downloaded the raw data from shillers website. I have converted the series to ...
2
votes
1answer
464 views

Get intraday data of SAP with google Finance

According to this link I try to get intraday data of SAP listed at Xetra. Intraday data with timestep of 1 second would be great. I do not understand parts of the command, I try ...
3
votes
1answer
172 views

Auto-correlation of GBM

The GBM is defined by $ dS(t) = \mu S(t)dt + \sigma S(t) dW_t, $ with analytical solution $ S(t^\prime) = S(t) ...
1
vote
2answers
142 views

Statistics of difference between two GBMs

if I have two asset prices modeled separately as geometric brownian motions. How do i go about calculating the expected statistics of their difference? Like given the sigmas and mus of both processes, ...
11
votes
2answers
305 views

How to estimate the following model?

Suppose I have the following model: $$r_t=\sigma_t * \epsilon_t$$ where $r_t$ is the return at time t, $\sigma_t$ is the volatility, the model used to model this volatility is an exponentially ...
1
vote
1answer
121 views

How to deal with different amount of td's in computing Sharpe Ratio

In calculating the Sharpe Ratio, should I take into account the days were I have 0 return due to non-trading day? Another user posted a similar question but this was related to trading days with no ...
3
votes
2answers
182 views

Iterating through every path of a Trinomial Tree

I am attempting to come up with an algorithm to iterate through every possible path of a trinomial tree and am having difficulties coming up with one. Is there any literature on this or has anyone ...

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